27 June 2006 External T.I. 2006-0172261E5 - Long Term Disability Benefits

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Tax status of long term disability ("LTD") plan benefits where three divisions of employees participate under the same plan, but where the employer pays part or all of the premium only for two divisions, and the premium for the third division is 100% employee-paid.

Position: No

Reasons: If an employer makes contributions for some employees, but not all, as may be the case where different divisions of employees participate in the same plan, the plan will not be considered to be an employee-pay-all plan even for those employees who must make all contributions themselves. It is the CRA's view that all payments out of a wage loss replacement plan to which the employer has contributed are subject to the provisions of paragraph 6(1)(f) regardless of the fact that the employer's contributions may be on account of specific employees only.

								2006-017226
XXXXXXXXXX 							Darlene Green
(613) 957-2082
June 27, 2006

Dear XXXXXXXXXX

Re: Long Term Disability Benefit

We are writing in response to your email correspondence of February 17, 2006 wherein you inquired about the tax status of a long term disability ("LTD") plan where three divisions of employees participate under the same plan, but where the employer pays part or all of the premium only for two divisions, and the premium for the third division is 100% employee-paid.

Our comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

Subparagraph 6(1)(a)(i) of the Income Tax Act, (the "Act") excludes from an employee's income the value of benefits derived from the contributions of an employer to certain employer-sponsored arrangements including, among others, group sickness or accident insurance plans, commonly referred to a wage loss replacement plans. However, paragraph 6(1)(f) of the Act applies to include in employment income any benefits paid to an employee from a wage loss replacement plan where the employer pays all or part of the premiums for the plan. The amount of the benefit included in income is reduced by the amount of contributions made by the employee pursuant to subparagraph 6(1)(f)(v) of the Act.

An employee-pay-all plan exists where one or more employees pay the entire premium cost. Generally, benefits out of such a plan are not taxable because an employee-pay-all plan is not a plan within the meaning of paragraph 6(1)(f) of the Act. However, it is a question of fact whether or not an employee-pay-all plan exists. In order to consider a plan to be fully funded by employees, there must be a legally effective requirement for the employee to pay the premium cost.

As outlined in paragraph 18 of Interpretation Bulletin IT 428 - Wage Loss Replacement Plans, if an employer makes contributions for some employees, but not all, as may be the case where different divisions of employees participate in the same plan, the plan will not be considered to be an employee-pay-all plan even for those employees who must make all contributions themselves. It is the Canada Revenue Agency's view that all payments out of a wage loss replacement plan to which the employer has contributed are subject to the provisions of paragraph 6(1)(f) of the Act regardless of the fact that the employer's contributions may be on account of specific employees only.

An employer may, however, contribute to separate plans for different classes or groups of employees. For example, there may be one plan for clerical staff and another plan for administrative staff, and each plan may be recognized as a separate plan. Where two or more plans are covered by the same insurance policy, separate plans are considered to exist if the administration of the plans demonstrates the fact that they are separate by separate accounting for claims, premiums and administrative charges. There must not be cross-subsidization between the two plans and the level of benefits, the premium rates, the qualifications for membership and other terms and conditions of each of the plans must not be dependent upon the existence of the other plan. Where the above criteria are not met, only one plan is considered to exist and all amounts paid out of the plan would be taxable in accordance with paragraph 6(1)(f) of the Act.

In summary, it is not possible to determine the legal obligation to pay premiums for any particular benefit and in turn, the tax implications of the plans you described, without a review of all the relevant documentation. If you would like confirmation of the tax consequences of a plan already in existence, you should send all the relevant plan documentation to the local district taxation office for their review. For confirmation of the tax consequences of a proposed change to a particular plan or a plan to be established, you may wish to obtain an advance income tax ruling, as explained above. Please note that in order to provide a definitive response we would need to review the current underlying plan documentation as well as the draft documentation supporting the proposed changes to the arrangement.

We trust that our comments will be of assistance to you.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch